The Hindu Business Line : RBI bars banks from outsourcing core functions

Banks should not outsource core management functions, including internal audit, compliance functions and decision-making functions, the Reserve Bank of India on Friday.

The decision-making functions that may not be outsourced include determining compliance with know your customer (KYC) norms for opening deposit accounts, according sanction for loans (including retail loans) and management of investment portfolios, said the RBI's final guidelines on outsourcing of financial services.

According to the guidelines, banks should also put in place a comprehensive outsourcing policy approved by their board.

Outsourcing arrangements should not affect the rights of a customer against the bank, including the ability of the customer to obtain redress as applicable under relevant laws.

Outsourcing by a bank also does not diminish its obligation, and those of its board and senior management, who are ultimately responsible.

"Banks would therefore be responsible for the actions of their service provider including direct sales/marketing and recovery agents, and the confidentiality of information pertaining to the customers that is available with the service provider."

Senior management would be responsible for, among other matters, evaluating risks and materiality of all outsourcing, based on the banks' own frameworks approved by their boards.

The RBI has listed several risks including what it calls `exit strategy risk': "This could arise from over-reliance on one firm, loss of relevant skills in the bank itself, preventing it from bringing the activity back inhouse and contracts entered into wherein speedy exits would be prohibitively expensive."